If you missed it, the argument in a nut shell is that self-managed super funds (SMSFs) are now sitting on a massive pile of cash (bigger than Westpac). They have a fairly small exposure to residential property, and surveys suggest they’d like to increase it. If they did, and took advantage of rules that allow them to leverage, we could see a huge surge into property.

First of all, thanks to Greg M for picking up on a mistake. I said that SMSFs could leverage against assets. As he correctly points out they can’t. SMSFs are allowed to borrow to invest, though the exact rules have changed a few times in recent years.

My reading is that it works the same for SMSF as it does for you and I, with certain deposit and loan to valuation ratios enforced by the banks. This means that SMSFs can leverage, but only off cash holdings.

I got a bit lazy with the distinction between cash and assets there. But it doesn’t change the numbers at all. SMSFs have more than enough cash to cover the kinds of property exposure they’d reportedly like, so those quick back-of-the-envelope calculations I did still hold water.

But thanks Greg for keeping me on my toes. It’s good to know my readers won’t let me get away with intellectual sloppiness.

Second, Amanda was wondering that if there was a demand for 700,000 properties from SMSFs, who would fill them? As she rightly says, “they have to fill those houses with tenants to see a return on investment… 700,000 or so more tenants need to be found in a very short time…”

The answer to Amanda’s question is exactly the dynamic that is going to drive prices higher.

If SMSF demand suddenly caused an increase in supply of 700,000 homes, then that’s right, there would be a glut of rental properties, and rental and property prices would fall.

But that’s never going to happen.

It’s funny. I write around 1,000 words per article and some people get a fixation on one single point like the 700,000 homes. The reason I mention it is to highlight how much money is in SMSF’s and what potentially is possible.

Here’s the reality…

As I said, we build about 70,000 homes a year at the moment, so unless we really start cranking up production, it would take ten years to build that many homes.

And as Amanda says, SMSFs are going to want to see a return on their investment. So the most likely scenario is that the SMSFs will just go after existing properties that are tenanted already.

That means they’re going to start competing for the existing investment properties already out there. Maybe some will build off the plan, but typically investors favour established dwellings.

But there’s only a limited number of those. So that means that all this extra demand is just going to jack up the price.

Remember it’s 700,000 properties at current price levels. As the price level goes up, SMSFs will need fewer actual homes to get the exposure they want. Some other investors will cash-out or get squeezed out of the market, and at some point, the market will find a new equilibrium.

I don’t know exactly what that end point would look like, but the only guarantee in that scenario is that prices will be a heck of a lot higher.

My mate John Fitzgerald pointed me to some back-of-the-envelope calculations he did. Now John is worth squillions, and has over 5,000 property transactions to his name. When he talks, I listen.

John agrees with the basic maths I’ve got. But he compares the SMSF appetite to the value of sales. He says that in Australia we sell around $190 billion in residential property each year.

With gearing, he reckons 30 percent of SMSFs alone could buy every residential property sold in Australia, for the next three years!

As he says, almost 3,000 SMSFs are being set up every month! In his mind, it’s a total game changer.

He reckons this is one of the factors that helps explain one of the property market puzzles of recent times. We’ve seen prices, particularly in Sydney growing strongly (if we annualised September’s growth we get something close to 30 percent!).

But credit is only growing at 4.7 percent. How can that be? How can we have a boom without credit growth? That’s never happened before.

He reckons the answer is that there are new buyers in the market that we’ve never seen before. One is SMSFs.

The other is the Chinese.

And he reckons it’s taken the market by surprise, because 6 years ago, neither buyer existed.

As he says, “I look at China and you can take my numbers on SMSF and quadruple them and still not come near the capacity there. John McGrath told me that one of his Sydney auctions in September had 16 registered bidders – all Chinese origin and all cash buyers.”

“The top two house sales in Australia this year were for $52m and $33m, both to the Chinese and both in cash.”
I’ve been saying this for a while too. I don’t think most people realise the kind of wealth machine that China has become.

Before the GFC, to make the top 50 wealthiest list in China you needed $6 million. Today, you need $3 billion. These days, they’re creating 25 billionaires per month!

China’s top 20 percent had $1.4 trillion in bank savings last year. John notes that just 13 percent of that would buy every house in Australia, in one year.

Thanks John. That’s some serious food for thought.

(And I think this probably answer’s Tom’s question from the last post, right?)

We’ve got a cyclical upswing combining with a massive paradigm shift in the make up of the market, with the twin giants of China and the SMSFs letting their presence be felt.

It’s going to be HUGE!

And thanks everyone for the comments. I don’t often have time to respond but I do follow them closely, and I’m always impressed and humbled by the intelligence and knowledge that’s on display.

As I said, it definitely keeps me on my toes. I can’t slack off with you lot around!

The RBA works incredibly hard to maintain it’s neutral status. Being the Switzerland of Australian government institutions isn’t easy.

I remember back in the 2004 election or something, there was a Liberal flyer that misleadingly implied that it was the RBA making the statement that interest rates would be lower under the Liberal party. The RBA never said, or would say, anything like it.

The RBA complained to Liberal HQ, but waited until the election was neatly out the way (and no one cared anymore) before making those complaints public.

The ‘credibility’ of monetary policy rests on the belief that the RBA is operating independently of political cycles. If that trust is broken, then the whole system (which has given us low inflation and low interest rates) would be in trouble.

So the RBA goes out of it’s way to be bland, uncontroversial, mostly boring.

And that applies to housing too.

And lot of the property doom-sayers have been pressuring the RBA to come out and say that there’s a property bubble and we’re in dire economic danger. They’ve been doing that for 15 years.

But the RBA never did. Partly because the RBA was never that worried. Hidden in pages and pages of public reports are softly-spoken statements that the RBA is actually not that uncomfortable with the level of house prices.

But the RBA also knows that markets hang on their every word. Every time Glenn speaks journos go through his words with a fine tooth comb, trying to find any hint of a change in his mood or his weathers.

So, could you imagine if Glenn said, ‘housing is over-valued’? It would create a self-fulfilling panic and property shake-down that would rattle the whole financial system.

… with just four words.

No, Glenn chooses his words very, very carefully.

That’s why I sat up and took notice last week when the RBA said they were a tad concerned about all the money from self-managed super funds that’s flowing into property.

Not that he said he’s going to do anything about it. Glenn the gunslinger is just letting us know he’s got his eye on it.

This got me wondering, what’s he seeing that we’re not. So I did a little digging in the data.

Turns out self-managed super funds (SMSFs) have grown up in the past few years. No longer the snotty nosed kid in short pants, they’re now a 500-pound gorilla. In June, SMSFs were worth an estimated $507 billion.

… that’s bigger than Westpac.

So now our mums and dads, running their own little nest egg machines, command a total pool of wealth bigger than one of our big four banks. Suddenly, what they do matters… in a big way.

Ok, so looks like Glenn’s on to something. So what about the property story?

Well, so far, SMSFs haven’t been big players in the property market. At the moment, residential property only accounts for around 3.5 percent of the total portfolio.

Well, that’s not massive. That’s about $18 billion. That’s makes them a sizeable player, but nothing over the top.

But hang on. That’s where they’re at now. But where are they going? Well, surveys suggest that SMSFs would like on average to have a much larger exposure to property – like something in the order of 30 percent.

Ok, now we’re talking serious cheese. If SMSFs followed through on that promise, they’d be throwing another $160 billion towards property. Drop a rock in the pond that big and you’re going to have some serious waves.

But wait, there’s more! Under current rules, SMSFs are allowed to leverage off other assets, and into property. So if we took a typical 70:30 gearing, we’re looking at something in the order of $350 billion.

Bam.

This is big bucks.

According to the latest RP Data report, average house prices in Australia are just short of $500,000.

So if SMSFs went fully invested and fully geared, we’re looking at extra demand for about 700,000 houses.
How big is that?

Well, remember that we only build about 70,000 homes a year at the moment. So we’re potentially looking at a sudden surge in demand that’s equivalent to about 10 years worth of current supply!

No wonder Glenn’s a little nervous.

In central banking, timing is everything. It’s like the dollar. The RBA doesn’t care what level it goes to. They’ll only intervene if it chops and changes to quickly – if it dives or if it spikes.

And so what’s worrying Glenn is not that SMSFs might become big holders of Aussie property. There’s no real problem with that. He’s worried about how quickly they’ll do it.

If they suddenly all jump in (which with rates as low as they are and stocks still dragging the chain, they could) you would see such a monumental surge in demand that it would tear the market apart.

And forget through the roof, it would send prices out somewhere north of Jupiter!

You could easily see prices double in less than a year I reckon…

But of course this is the extreme, fully invested, fully geared scenario. I don’t think we’ll see a price explosion quite on that scale.

But it’s going to give a big bump to prices, that’s for sure. And it’s got Glenn worried enough to send off a few warning shots.

In the last post I sent out, one of the charts just wasn’t viewable for some reason. It’s tempting to blame a conspiracy of the big banks and university economists, but it’s more likely that it was one of those technology bugs.

But it’s an interesting chart, and for my money one of the best snap-shots of where the property market’s at right now. So I thought I’d repost it here.

ANZ pulled this one together. As I said last time, it compares auction clearance rates and the year on year change in house prices. It’s a pretty tight fit, hey? They’ve been moving in lock step since the GFC.

They also let clearance rates ‘lead’ house prices by 6 months. That makes sense. It says it takes about 6 months before everybody cottons on to what’s happening. Clearance rates are increasing, but prices are a bit slower to follow.

And so it allows us to look 6 months into the future. And what does that future look like? Well, as it shows on the chart, it’s saying that in 6 months, expect to see year on year house prices increases of around 13 percent, and moving higher.

Which, as I said last time, is what I’ve been saying for a while.

But the other point I made in my last post is that it’s interesting that ANZ is now out there making bullish calls on property. That’s a turn of events.

But they’re not running loan wolf, sorry… lone wolf on that one. A lot of the big houses have changed their tune. Take CBA, for example.

They put out a chart on the demand / supply balance in the housing markets last week, and it was one the most interesting I’ve seen in months.

You’ll remember that last week I was looking at supply and demand in the market, and arguing that demand had been outpacing supply for a while now. Mostly because the rate at which we build new houses has been falling for decades, even though our population keeps increasing at a faster and faster rate, and we have smaller average household sizes.

This is what this chart picks up. It’s CBA’s estimate of where the demand and supply balance is at:

If you follow the track of the green (demand) and red (supply) lines, it shows you that demand is currently running ahead of supply, as it has done for most of the past 15 or so years.

And if you look at their estimate of the demand supply balance (the blue bars), it shows that we’re currently experiencing the biggest imbalance since at least 1990, with demand massively outweighing supply.

And this means, that from the most basic and fundamental level of the housing market, we’ve got huge upward pressure being applied to prices. And that’s their central conclusion. Expect to see more price increases.

I’d even suggest that this estimate is a little conservative, if anything. I don’t remember there being a huge excess of supply in the years before the GFC – growing prices certainly didn’t suggest that there was.

But as I said in my last post, the big guys have some good reasons to be conservative. If you make a big call, put yourself out there, the reputation costs of getting it wrong far outweigh the small bragging rights associated with being proven right.

And this, as much as anything, tells you what’s going on in the market right now. That the big banks like ANZ and CBA are now out there talking up property, publishing charts like these that clearly show the amount of pressure on prices right now… that tells you just how far the market has turned.

These guys wouldn’t be taking positions like this if it was still a 50/50 call. They need a lot more certainty than that before they man-up and put themselves out there.

And so when the big investment houses turn, as they have done in past few months, then it’s as close to an iron-clad guarantee as you get in this game. You can bet the house on it.

House price increases, somewhere north of 13 percent, are now the baseline scenario. That’s the conservative position. It could very easily be a whole lot more than that.

It’s exactly what I’ve been saying all year. These are exciting times.

A lot of the market indicators were pointing down, there were still some pretty huge risks on the international horizon, and there were a lot of folk who were arguing that a 15 percent fall was more likely than a gain.

Now I’m not one to say, “I told you so….” Well, actually I am. I told you so. You’ve got to blow your own trumpet in this game. No one’s going to do it for you. You’ve got to own your successes and your failures.

And you’ve got to pull the market up when the market get’s it wrong. The last year or so shows just how the market, and almost every ‘expert’ in the country, can have no idea about what’s happening right under their noses.

I went out on a limb. A lot of people thought I was nuts. But ‘the best minds in the country’ were looking at exactly the same story I was, and they were getting it exactly wrong.

Take a look at house prices right now.

There is a solid momentum behind prices, across the country. Sydney, as we know is leading the way, but as this chart shows (thanks to the SMH), every capital on is an upward course (though I guess Adelaide and Hobart are still looking a little flat).

But whilst I’ve got your attention, take a good look at Brisbane. On the upward march, but prices haven’t recovered to the 2007 highs. That’s why it’s my pick of the bunch of places to invest right now.

In 12 months, I’ll be sending out an email talking about this very day and gloating about yet another prediction being bang on the mark.

However, let’s get back to the main theme.

The pace is only accelerating. According to RP Data, Sydney House prices rose 5.2 percent in the September quarter. In Melbourne they were up 5.0 percent in the quarter.

If they keep that pace up, then we’re looking at 20+ percent in the not too distant future…

And if you want a real guide to exactly how hot the property market is right now, look at auction clearance rates. As this chart shows (again thanks to the SMH), auction clearance rates are on a massive bull run.

In Sydney and Melbourne, we’re now back around the peak levels achieved in the boom of 2010.

But look at Adelaide! Adelaide gone even further, taking clearance rates to the best level in years – even taking it to the traditional auction centres of Sydney and Melbourne.

If auctions are clearing, which means buyers are buying and sellers are selling, and we’ve got more and more properties coming on to the market, price rises are simply inevitable.

The market never just churns in one spot, especially when interest rates are so low, and there are all sorts of factors pointing to a boom (check out my last three posts for example.)

And how much are prices going to rise?

Well, ANZ has done some interesting work on this question.

They’ve pulled together this chart here. It compares national auction clearance rates with the year on year change in house prices, letting auction rates lead prices by about 6 months.

Well, would you look at that?

You can track the close relationship between clearance rates and prices since the GFC. And you can see that the recent price increases we’re enjoying right now are totally consistent with the pick up in clearance rates we’ve seen through the year.

(Makes you wonder how so many got it so wrong for so long…)

And look at where it says we’re going. If this close relationship holds, and there’s no reason to expect it won’t, then it’s saying in six months we could expect to see house price growth up above 13 percent.

13 percent! Suddenly my call for 15 percent is looking ‘middle of the road’, ‘in line with market expectations’, ‘conservative’.

I thought I was out on my own. Now I’ve got all sorts of economists stepping on my toes.

So there’s an interesting lesson here. And it’s not that property prices are booming. We all know that.

It’s about learning who to trust in this game.

As I’ve said more than once, you can’t trust the media. They’re only interested in disaster stories and making papers sell…

But you can’t trust the big economic houses either. They’ve got their reputations on the line. If they go against the herd – against what everyone in the market is saying, and make a big call, like I did, they’ve got a lot at risk.

If it comes off, they get some props, a few pats on the back, and a lot of people who think they just go lucky.

But if it blows up in their face – if they make a big call and the market goes in the opposite direction, then they look like a proper idiot.

‘How could they miss what everybody else saw coming?’ ‘How could they get it wrong when the truth was so obvious?”

It’s enough to kill the career of any young economist. So the downside risks are huge, and far outweigh any benefits that might come if you get it right.

But if you just follow the herd on the other hand, and you get it wrong, then you just say, well, nobody else saw it coming. It was a total surprise out of left field. You can’t blame me.

And so these professional economists simply have an incentive to play it safe – to not break from the consensus reality, no matter how they actually see it.

And this is why the market as a whole can get it so wrong for so long, just as they have done with house prices over the past year.

So what’s the solution? Well, you’ve just got to find sources you can trust. And not because they look like they’ve got an honest face. Take the time and check out the arguments they’re making, and decide for yourself if it makes sense.

And of course, see if they get it right.

I live and die by my calls. Not because I want to be a smart-arse, but because I’ve got real money (my own money) invested in a big way. I don’t seek media attention, nor do I want to write for newspapers, magazines or build a career as a journo.

In my last article I noted how housing supply seems to be falling further and further behind demand.

Each year we build fewer and fewer houses. And over the last ten years, growth in the housing stock failed to keep pace with population growth. This is the first time this has happened since WW2!

This has a few really important implications.

The first is that all this talk of a bubble is completely over-blown. (hey? How’s that for a pun? Put that in a Christmas bon-bon.)

Because unless there’s a glut, then there can’t be a bubble, and unless there’s a bubble, then there can’t be a bust. This is one of the most important differences between the Australian story and what happened in America.

We also know that if supply is falling further and further behind demand, then there must be upward pressure on prices. This is as true of housing as it is of any market.

And so this supply shortfall goes a long way to explaining the trend increase in house prices we’ve seen over the past 50 years or so. Not the full story, but a fair bit of it.

And supply doesn’t look like it’s going to come bouncing back anytime soon. This means we can expect to see continued upward pressure on prices.

And all that is true for a given level of demand. But the truth is that there are major structural and demographic changes happening on the demand side that mean the supply and demand gap is getting even bigger.

Which of course means we’ll see bigger and bigger price increases.

So what’s happening on the demand side?

Well, in a nut shell, we’ve seen a bunch of changes that means we need more houses for the same number of people. That means that actual demand for housing is actually growing even faster than population growth, which itself is already growing faster than supply.

Over the past 50 years there have been significant changes in the way we live. Take average family sizes for example. As fertility rates dropped, average family size has been on a steady downward decline for decades now. That means we need more houses to accommodate the same number of people.

At the same time, family breakdowns have split many families in two, effectively doubling that family’s need for housing.

And what’s more, a steadily ageing population has resulted in more people living alone, again meaning we need more dwellings to house the same number of people.

And according to the 2011 census data, of the homeowners aged 70 and over who live alone, 62 percent have a house with three or more bedrooms. That adds up to 238,078 houses with at least three bedrooms occupied by just one person.

Among houses owned by older couples (with at least one partner aged over 70), 82 percent – or 332,752 houses – have at least three bedrooms.

And the Australian population is only getting older, so we’re going to need more and more housing. Some older people might downsize into something more practical, but people are generally reluctant to leave their communities and the family home.

Together, these structural and demographic factors – smaller families, more split families, more older single-person families – mean that the average number of people per dwelling has been on a long-run downward trend for over a hundred years!

That’s what this chart here shows:

What’s interesting here though is notice the small pick up between the 2006 and 2011 census. That’s the first rise in at least 100 years!

How do we explain that? Well, I don’t think there’s been any change in Australian preferences. What I think it reflects is tighter economic conditions through the GFC.

As money became tighter, people started share-housing, kids moved back in with their parents, or delayed starting out on their own.

If that’s true, what it points to is even more pent up demand. As economic conditions continue to solidify around the country, people will look to head back out on their own, and the average household size should return to trend.

And ultimately what the downward trend in household size means is that actual housing demand is growing faster than population growth. So if we know that population growth is growing faster than supply, then we know that actual housing demand is growing even faster than supply.

And this of course means more upward pressure on prices.

Of course, the other important factor here is the expansion of investor demand over the past 30 years or so. I’m planning to write a bit more about that later.

And so looking back at the past 30 years, it’s not hard to see demand for housing to live in, combined with demand for housing to invest in, running far, far ahead of supply.

And so when I look at the prices rises we’ve seen, I just don’t see a bubble. The price rises we’ve seen make perfect sense.

And I see these dynamic continuing to drive the market going forward. Unless there’s a slow down in the rate of population growth (unlikely) or an increase in the average household size (very hard to see where that would come from) OR there is suddenly a lot more supply brought to market (how?), then undersupply and growing prices will be the norm for many years to come.

Add to that the lowest interest rates in 50 years and a cyclical upswing out of a prolonged soft patch, and you’ve got all the ingredients of a boom.

There’s a saying in central banking. Bubbles are like porn. No one’s got an exact definition, but you know it when you see it.

Those crazy central bankers.

But probably the key indicator of bubbles is a disconnect between prices and fundamentals – particularly supply and demand.

To make that clear, compare two significant economic events: The dot-com bubble, and …

… the ‘Tickle Me Elmo’ doll.

The Tickle Me Elmo doll was a flash-in-the pan phenomenon just prior to the Christmas of 1998. For some reason, this useless and annoying toy became the MUST-HAVE item of the year.

Demand went ballistic. The manufacturer had the conveyor belt going day and night, but just couldn’t pump enough of the critters out. And with only so many shopping days before Christmas, surging demand and limited supply sent prices through the roof.

And there were reports of Tickle Me Elmo dolls going on the black market for thousands of dollars.

Pure madness.

But was it a bubble?

I’d argue that it wasn’t. It was just the market doing what it does. Demand was greater than supply. Prices rose. Once demand cooled (after Christmas), and supply caught up, prices returned to what we might call ‘sane’ levels. No bust. Just a predictable wind-back of prices.

This is a market functioning perfectly. More-over there was no speculative element to the Elmo craze. No one was buying up Elmo dolls in the belief that they’d be able to sell them at a handsome profit next Christmas…

Compare this to the dot-com bubble. Companies were being floated for insane amounts of money, with out ever having turned a cent – without even having a demonstrated business model!

Demand was high, but supply was high too. New, and ever more useless companies floated every day.

The point I’m trying to make is that prices followed a similar course in both markets. One was a bubble. One wasn’t. One was completely disconnected from reality. One was predictable and vanilla market functioning.

Just because prices rise, doesn’t mean there is a bubble.

Remember this. This is a very important point.

Just because prices rise, doesn’t mean there is a bubble.

The other day I showed you this chart here.

Bubble-blowers in Australia point to this chart and say, ‘See. Look at how much house prices have risen, especially relative to other housing indicators. There must be a bubble.’

But just because house prices have risen, doesn’t mean there’s a bubble. You need to take supply and demand into account, because it’s entirely possible that supply and demand fully account for this differential. And I’d argue that they do.

The other thing bubble-blowers love to do is point to the run up in Aussie prices, and say, “See. Looks like the run up in the US. Must be a bubble.’

But there’s a key difference here. And that’s supply. There was a glut of properties in the US, which meant the run up in prices wasn’t in line with fundamentals.

But in Australia, we just haven’t been building enough new houses. For years. Supply just hasn’t been keeping pace with demand.

To get a feel for that, compare population growth with growth in the housing stock. It’s a pretty crude measure of supply and demand, but it will do.

What you’ll find is that in the 70s and 80s, the housing stock was growing at a much faster rate than the population. Between 1976 and 1991, the housing stock grew by 41 percent, while the population grew by 23 percent.

But from that point on, the balance started to shift. Between 1991 and 2001, Australia’s population grew by 11.5 percent, while the housing stock grew by only 18.3 percent. That differential of 18 percentage points in the 70s and 80s shrunk to less than 9 p.p by the 90s.

But the balance just kept on shifting.

Between 2001 and 2011, the population grew by 15.9 percent, while the housing stock grew by only 15.2 percent. Population had outpaced housing stock for the first time since the end of World War II!

What this means is that if you want to make the argument that Australia has a bubble, then you have to make the case that there’s a hidden glut of supply now. That somehow it’s worse now than what it was back in the 70s – back when the housing stock was growing twice as fast as the population!

It’s not clear exactly where the balance is now, but it’s certainly clear that the market is a lot tighter than what it was – and only getting tigher! Increasing prices are just what you’d expect to see in a market like this.

Aussies just don’t build enough houses. The credit crunch that followed the GFC has put the brake on developers in recent years, but this has been several decades in the making. Check out this chart.

It’s data on New Home Sales from the Housing Industry Association. What it shows is the trend long-run decline in new home construction – down from around 120,000 houses a year in 1997, to around 70,000 a year today.

So if you want to argue that there’s a glut (and a bubble) today, you have to explain why there wasn’t a glut and a bubble back in 1997, when supply was that much stronger.

And why aren’t we building enough houses? Well, that’s an interesting question, and I’m not sure what the answer is. I think it probably has a lot to do with the way we lock up land around the cities. This pushes up land prices, and makes building houses a less profitable proposition, even with rising prices.

Whatever the case, it seems extremely unlikely that we’ve ended up with a glut in the national market (though perhaps there could be pockets here and there.)

And without a glut, we can’t have a bubble. And without a bubble, we can’t have a bust.

That means supply and demand will keep driving market direction. And with fewer and fewer homes coming to market each year, that direction’s going to be up…

… especially as demographic factors super-charge demand. More on that next time.

So the media has pretty much entirely come around to my point of view. Property has made a come back. The next bull run has begun.

But not happy to leave us with a good news story, the media has gone and run ahead of the game again. Suddenly we’re back into bubble territory.

“Housing Bubble Trouble” – The Age, 22/9/2013

That’s effectively got to make it the shortest bull run in history. Just a matter of months after the doom-merchants had realised their positions had become untenably ridiculous, the boom cycle had run its course, and we had a bubble on our hands.

Turn it up.

What do they take us for?

Even the RBA was out hosing down the media during the week. RBA Assistant Governor Malcolm Eddey said all this talk of a bubble was “unrealistically alarmist.”

That’s polite central bank speech for bulls#*t.

But that’s just the way it is. The media is always fishing for the next disaster story. The next little girl locked in a basement. It’s what sells.

We don’t buy papers to be told everything’s fine. We buy papers to be informed (=scared).

But even though it’s all alarmist rubbish, I still wanted to take a look at this bubble story. I’d bet my last two cents this isn’t the last we’ve heard of it.

Because remember we’ve had people making a song and dance about the bubble since the before the millennium clocked over.

But I want to make the case that there was no bubble. There never was, and there never will be. (ok, I don’t know about never, but not in the next few years anyway.) And the price rises we’ve seen all make sense in the context of the fundamentals – especially those most basic of fundamentals, supply and demand.

And this isn’t just an academic exercise. The stakes are high. Why? Well it’s not just about whether you and I make money out of property over the next ten years. This is about whether Australia remains the lucky country, or falls into an Irish bog hole.

Remember what happened in Ireland? A property market crash there wiped out the banks. The banks held the government to ransom, said if you don’t bail us out we’re taking the economy down with us. The government caved in, and the bail-out package wiped out the government.

I don’t think that will happen here, but it’ not because we’ve got better government or less greedy banks. Oh no.

Because it is true that our banks have a huge exposure to property. Take a look at this graph from the IMF. What it shows is that over 60 percent of the Australian bank loan book is made up of real-estate loans.

That makes our banks the most property dependent banks in the world. And this list includes countries where there arguably are bubbles emerging, like Canada and Norway.

Now our banks are also some of the best capitalised banks in the world, and our regulators have, so far and relative to some other countries, been on top of their game. So I don’t think there’s any real risk here. But it does highlight what’s at stake.

If there was actually a bubble, and that bubble burst… if a whole lot of mortgages went sour and people started defaulting on their loans… then the banks would be in real trouble.

And if one of them went down, even one of the minor or regional banks, because they’ve all got their hands in each other’s pockets, the whole system would get the wobbles.

And then it would be up to government’s to bail ‘em out of that mess. The government’s got deep pockets and a good credit rating now, but saving a banking sector isn’t cheap. Just ask Ireland.

And this is why we’ve had so many people worried about whether the housing market’s gone bubble or not. The stakes couldn’t be higher.

And of course it’s not hard to see bubbles if you’re looking for them.
This chart here neatly sums up some of the bubble-blowers main arguments. It comes from one of my favourite bubble-blowers, Leith Van Onselen at Macro Business.

What it shows is house price growth, relative to other ‘housing fundamentals.’ We all know the story. Since the mid 80s house prices have grown quickly, much faster than the economy itself (GDP).

And house prices have grown faster than the cost of the physical house itself (construction costs), faster than the return on investment (rents), and faster than our ability to pay for them (disposable income).

The argument then runs that the fundamentals don’t justify the price. On all these measures, house prices seem over-valued.

Why would house prices grow faster than GDP, if not for a bubble? Why would people invest more in an asset than the returns justify, if not for a bubble? Why would prices run way ahead of the physical cost of the house itself, if not for a bubble?

It’s all very neat.

But it’s all very wrong.

Because there’s an answer to all of those whys: supply and demand.

The dynamics of supply and demand dominate all of these factors. And so if demand is running way ahead of supply, it is possible to have sustained increases in price, even if the “fundamentals” are not keeping pace.

And I’d argue that the last 30 years have been characterised by mismatched supply and demand.

Demand has been increasing strongly, thanks to population growth, demographic dynamics, and financial revolutions that have made property much more attainable to the average citizen.

But at the same time, supply hasn’t kept up. New construction levels fall further and further behind the population growth rate every year, and zoning restrictions tie up and limit the supply of buildable land.

And the more the gap wides, the higher prices go. There’s no bubble here. Just simple, text-book supply and demand. And it only shows prices going higher still….

Don’t believe me? Over the next week, I’ll take a closer look at supply, and a closer look at demand, and you can decide for yourself.

In fact, some of the best business ideas have that, ‘why didn’t I think of that?” factor.

Take BBQ’s for example.

In the mid-70s, Hilton Mason welded a hot plate and a grill onto a mobile trolley with a gas inlet and called it a BBQ.

Genius.

But didn’t aussies go mad for it?

Now, his company, Barbeques Galore has 78 franchises across Australia. A simple idea, powerfully executed, and bang, you make yourself a very rich man. And thousands of people are left scratching their heads, ‘now why didn’t I think of that?’

A lot of times in life you’ve just got to grab the beef by the horns and go with it. If you see an opportunity, it’s likely that a lot of other people do to, or are about to. If you wait around to see how it plays out, it will be too late. The beef has bolted.

Here’s an interesting fact. The word barbeque comes from the French phrase “barbe à queue”, which translates as “from head to tail” – a method of cooking a pig whole.

But in Texas they say they came up with the common acronym ‘BBQ’. Only in Texan folk lore it apparently stands for ‘Beer, Beef and (pool) cues’ – a sign that used to hang out the front of old road houses.

But a love of beef and barbeques isn’t the only thing Australia and Texas have in common (though is there any culture on earth that doesn’t like cooking meat over a fire and eating it?)

They’ve both got desert landscapes, starry skies and a love of cowboys and now, both places are on the verge of a major housing boom.

(See how I wove that in there? I’ve been doing a creative writing course.)

In my piece a few days ago, I picked up on the solid housing recovery in the US. But while the country as a whole is doing well, some states are booming.

Like Texas.

The other day I saw a story about a 5-bed room house in Las Vegas selling in mid-July for $499,000 – double the price it sold for three months ago!

Maybe that lucky investor was one of my readers.

Way back in February I was highlighting the coming boom in Las Vegas – driven by institutional investors like Warren Buffett:

“If you follow the big money in America right now, it will show you that the serious investors believe that the property market has bottomed, and we’re launching into an upswing dynamic.

“And if you follow the scale of funds being directed into property, it tells you that these guys believe that a lot of property markets over-corrected in a big way in the downturn. That is, prices fell too far and a lot of high-performing properties are massively undervalued. Las Vegas is a case in point.”

Well, turns out I was right on that one. With the national property market finding a floor, Texas, and nearby Ariozona, have swung into boom land.

In Vegas, house prices grew 23 percent over the year to May. In Phoenix, Arizona they grew 21 percent – heading up the national leader-board.

In part, these gains have been made possible by the severity of the downturn. Homes in Vegas lost 62 percent of their value in the GFC. In Arizona, they fell 56 percent.

But all that’s done is create more upside for potential for those who bought at the bottom. As Buffett’s been betting all year, the market went too far, and a sudden bounce back was the most likely scenario. And that’s exactly what we’ve seen.

Private equity firms, hedge funds and REIT’s have had a voracious appetite for housing, especially foreclosed or distressed sales. They’ve raised at least $18 billion, and bought more than 100,000 properties since 2011.

But they’re not the only ones buying up big.
The surprise factor has come from south of border. South American investors, with pockets full of cash as a commodity boom drives wealth at home, are increasingly looking for somewhere safe and secure to park their money. US property has become a popular destination.

This has interesting parallels with the Australian situation, with Chinese and Asian buyers making significant plays for Aussie property. And for much the same reason – Australia is a safe and secure, mature economy, and property is always solid performer.

But the American demand base is broader still. The government’s mortgage finance policies (such as the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP)) have provided a further boost to refinancing and home-owner demand, helping our mums and dads mix it with investors.

And so demand is bouncing back, especially as buyers realise that prices are on the march again. The window for nabbing a bargain is closing quickly.

On the supply side, the recovery in the US is actually pulling homes off the market, as there are less distressed sales coming to market these days.

In part this has been driven by stricter foreclosure practices, enforced by states like Nevada, which found that it wasn’t clear which banks actually had a right to the houses they were foreclosing on! Banks will be banks.

But at any rate, the “shadow inventory” of homes seems to be clearing. There are 7.6 percent less homes on the market than there were a year ago nationally.

So what we’ve got is expanding demand and tightening supply.

And I’ve got a jelly bean for any one who can tell me what that means…

Yep. Rising prices.

The boom in US property I flagged 6 months ago is up, up and away. It’s gathering steam but there are still some super bargains if you know where to look.

The economy’s in the doldrums, it rains 350 days a year, and the cultural culinary high-water mark is a shepherd’s pie. Meat AND mashed-potato… IN A PIE!

Genius.

But I feel most sorry for the poor old mum and dad British investors. Ignorant, naïve and cashed-up. Everything a scammer could hope for.

And now a text-book guide to everything that can go wrong in off-shore property investing.

You’d think they’d learn. There’s been 20 years of investing horror stories, across the Mediterranean, but they keep coming back for more.

And right now, here in Greece, there are a whole bunch of specialist agencies lining up to market bargain basement Greek property directly to the Brits. Some of them are probably ok. Some of them are probably shamelessly criminal.

One of those organisations is the Greek government itself. Apparently you can now rent out the treasures of ancient Greece – places like the acropolis – for fashion shoots or music videos… for a modest fee.

Maybe if we ever go broke we could do something at the Sydney Opera House, like put on a concert. Oh wait…

But there are shysters out there playing off the British dream of a cute little holiday villa in the Mediterranean. And who’s going to help them do anything about it. MI5?

I’ve been looking around at property since I’ve been here (I can’t help myself. Some people like looking in Galleries, I like looking in real estate windows…) And there are some bargains here to be sure!

I’ve seen places, quality places, going for discounts of 50-70 percent. Premium inner city houses, stunning water-front villas. There are some incredible bargains on offer.

Because the debt crisis has had a huge impact on the Greek property market. And the truth be told, a down turn in property was underway well before the debt crisis hit. Actually it was one of the key causes.

But now property prices nationally are 30 percent lower than they were three years ago.

And in the 5 years leading up to the GFC, an average of 150,000 properties changed hands every year. Now, Greece is lucky to post 10-20,000. Volumes are down an incredible 90 percent!

A 30 percent fall in prices, a 90 percent fall in volumes? That’s a property market that’s been decimated. But it’s also a property market that’s offering up some incredible bargains.

And new taxes on property are pushing even more sellers on to the market. If it isn’t a buyers market, I don’t know what is.

And it’s a market that’s attracting buyers from all over Europe, not just the UK. Snare yourself a piece of paradise at bargain basement prices!

But I wonder if the British mums and dads really know what they’re doing – if they really understand the risks.

It highlights some issues that everyone thinking about offshore property investment should be aware of.

First of all, the Greek property market is not particularly sophisticated – definitely not relative to Australia. There’s still no one website to look at all properties available for example.

So buyers are relying on buyer’s agents to source their properties. But how much can you trust your buyer’s agents? Often, they just work on commission, so unless they think you’re going to be a repeat customer, they don’t really care what piece of crap they flog you.

You think the Brits would have learnt this lesson in Spain. A lot of folks bought there, completely sight unseen! And then it turned out that quaint little villa with water-views was actually a hovel with a garbage tip aspect. And there was nothing they could do about it.

The second issue is the difficulty of navigating a foreign legal minefield. Greece doesn’t have a reputation for being light on red tape. And there’s still a lot of uncertainty around the legality of foreign title.

Again, you’d think their experience in Turkey would have been instructive. There were a lot of cases there of transactions that lacked the proper documentation, which meant that down the track they were null and void. There were also cases of Brits rocking up to find that the title had actually been put into the name of the buyer’s agent’s cousin.

And how many do you think had the pockets or the wits to try and drag someone through the Turkish legal system? You’re a long way from home.

The other thing I wonder is how many of them are hedging, or even really understand the currency risk involved…

There’s always the Pound / Euro risk. It’s not really clear which way that might go. There’s a lot of factors to consider.

But what about the risk that Greece exits the Euro? That still remains a possibility. Those Brits could find themselves with a euro-based mortgage against an asset denominated in next-to-worthless drachmas… scary.

And then there’s sovereign risk. Foreign property owners (with no vote!) would be tasty targets for tax hikes to try and fill the budget black-holes.

It’s a minefield.

Now I’m not saying Greece is a no-go zone. I’ve been keeping an eye out myself. There are some incredible bargains. And if you could afford it, and you bought well, a piece of paradise is a piece of paradise, no matter what happens to the economy.

But you really need to know what you’re doing if you’re going to invest off-shore. Or at the very least, you really need to partner with someone who does, and who is someone you can trust!

Get that in place, and Greece could be an incredible opportunity.

But if you don’t you’re just a lamb to the slaughter. Makes me wonder how many unsophisticated Brits are being led up yet another Mediterranean garden path…